Posted on Wednesday, November 17, 2010
Loans to real estate developers ticked like a "time bomb" ready to sink BankAtlantic Bancorp’s stock, but investors were purposefully kept in the dark, a shareholder attorney argued Wednesday as a securities fraud class action trial neared its conclusion in Miami.
Company attorney Eugene Stearns expressed outrage at the notion, and peppered his closing arguments with "ridiculous" and "laughable" to describe the plaintiff case. He said the parent of Fort Lauderdale-based BankAtlantic was the first to pull out of South Florida condominium construction lending and repeatedly raised red flags to say its loans to commercial developers were running aground.
The company’s stock went off a cliff in late 2007 because holding company chairman and CEO Alan Levan was truthful, not the opposite, Stearns said.
The shareholders, led by the State-Boston Retirement System, claim Levan intentionally misled investors about the bank’s developer loan portfolio in conference calls with stock analysts. About $175 million in developer loans were in jeopardy by late 2006, said lead shareholder attorney Mark Arisohn.
While the bank trumpeted conservative underwriting, he said many of the loans were questionable because they were for rural developments with little surrounding services. The company’s quarterly and annual reports compounded by executives’ statements to investors amounted to "lies, more lies and more lies," Arisohn said.
Levan took the stand on behalf of the bank, saying he was as honest as he could be as the South Florida real estate market started to break down.
"Banking is a risky business," he told the jury.
But shareholders say BankAtlantic used old appraisals and inflated sales estimates to assess developers’ loans. Arisohn of Labaton Sucharow in New York claimed bonuses at the bank were tied to making more loans — no matter how risky — and told jurors it is time banks were held responsible for their contribution to the financial crisis.
"This case is not about the economy. This case is not about the recession. This case is not about the downturn in the real estate market," he told the jury in U.S. District Court in Miami. "These defendants committed securities fraud." He charged false and misleading statements had the effect of inflating the stock price.
Shareholders would like to frame their civil complaint as a securities case, said Stearns, a partner at Stearns Weaver Miller Weissler Alhadeff & Sitterson in Miami, gesticulating in front of the plaintiff table. "It is a real estate case. ... The underlying issue is what happened to the Florida real estate market and how it affected BankAtlantic."
He went through a chart showing how the fall of BankAtlantic’s stock from about $70 in January 2006 to under $1 today correlated with statements made by Levan and other executives on trouble with its loan portfolio as developers walked away from projects and defaulted on loans.
The loans in the bank’s portfolio were a "ticking time bomb because they were carelessly underwritten," Arisohn said,
BankAtlantic executives thought the bank could ride out the storm even if it had to foreclose on property based on pledged collateral, but it didn’t anticipate builders would undercut property values by unloading inventory at steeply discounted rates, Stearns said.
The jury is expected to start deliberating Friday after the Veterans Day holiday.
A 56-page verdict form lists 19 allegedly false public statements or omissions of fact by Levan. To find BankAtlantic liable, jurors must find the statements were willful or reckless. If the jury reaches the question of damages, it would be asked to calculate the value of share price declines between October 2006 to October 2007. U.S. District Judge Ursula Ungaro ruled that testimony during the trial indicated investors’ damages should be limited to no more than $3.30 a share if jurors find for shareholders.
The trial is only the 12th since Congress clamped down on shareholder lawsuits in 1995 with the Private Securities Litigation Reform Act.
She ruled Aug. 18 that four of 26 disputed statements made during a July 2007 conference call with stock analysts were untrue.
Stearns conceded the four statements found to be untrue by Ungaro are false, but countered by saying Levan meant no harm and that he simply wanted to underscore the problem with the commercial loan portfolio.
Arisohn pointed to internal e-mail in 2006 showing growing concerns about loans to developers.
He said the defense’s case turns on the credibility of Levan. Arisohn claimed the bank chief repeatedly lied to investors and asked jurors if they would make an important decision in their lives based on Levan’s word.
BankAtlantic has suffered 12 consecutive quarterly losses and has lost $71.8 million in the first half of this year.
Stearns said finding BankAtlantic liable would be akin to chopping down the lone standing tree after a catastrophic hurricane. He appealed to hometown sentiment by saying the bank lends money to Floridians to "do the business of Florida."
The veteran attorney said it would be a "sad event" if jurors found against his client.John Pacenti Daily Business Review